Ruling shows breadth of an insurer’s duty to defend third-party claims

The 9th U.S. Circuit Court of Appeals' Jan. 17 decision in PHP Insurance Service, Inc. v. Greenwich Insurance Co., 16-15083, underscores the breadth of an insurer's duty to defend third-party claims in California and, more specifically, the often-overlooked potential for coverage for so-called "wage and hour" claims under employment practices liability policies. [See link below to read the unpublished opinion.]

PHP Insurance Service, Inc., PHP Group, Inc. and Trung Tran sought insurance coverage under an employment practices liability policy issued by Greenwich Insurance Company for a class action alleging that PHP failed to provide accurate itemized wage statements as required by California Labor Code Section 226, as well as other violations of the Labor Code relating to overtime, meal and rest breaks, maintenance of payroll records, and compensation for vested vacation hours. PHP's policy expressly covered "Wrongful Employment Acts," which was defined to include "discrimination" and "harassment." The policy also included an exclusion for "any Claim based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving: ... any actual or alleged violation of ... the Fair Labor Standards Act ... or similar provisions of any federal, state or local statutory law or common law."

Greenwich denied coverage for the lawsuit, asserting that all of the underlying claims were excluded because they "were only for violating statutes governing employees' wages and hours." Greenwich further argued that even if the exclusion did not apply, the lawsuit was not covered in the first place because it did not allege a "Wrongful Employment Act."

The district court and the 9th Circuit disagreed. Although the complaint filed by PHP's employees did not include a cause of action for discrimination or harassment, the 9th Circuit held "that Greenwich had a duty to defend based on allegations in the first amended complaint that were potentially covered by the policy's definitions of discrimination and harassment." Specifically, the complaint stated that "Defendants run [PHP] as a taskmaster over immigrant and Vietnamese workers, consisting of Plaintiffs and the class of employees they seek to represent." The complaint further stated that "Defendants purposefully hire recent immigrant workers to improperly take advantage of their lack of knowledge regarding labor and employment rights" and that some employees were required to "change their Vietnamese names to American names that were selected by ... Tran." The 9th Circuit held that "[t]hese allegations sufficiently triggered a duty to defend based on the policy's definition of 'discrimination' due to the 'segregation, classification or modification of any term or condition of employment of any Employee ... because of race [or] national origin.'"

The decision reaffirms the broad scope of the duty to defend in California. As the 9th Circuit explained in Pension Trust Fund for Operating Engineers v. Federal Insurance Co., 307 F.3d 944, 951 (9th Cir. 2002), "[t]he duty to defend does not usually turn on whether facts supporting a covered claim predominate or generate the claim. .... Instead, California courts have repeatedly found that remote facts buried within causes of action that may potentially give rise to coverage are sufficient to invoke the defense duty." Indeed, the California Supreme Court has stated that "a bare 'potential' or 'possibility' of coverage [is] the trigger of a defense duty." Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 300 (1993). The expansive scope of the duty to defend is critical for insureds because, if there is even one potentially covered factual allegation or claim, the insurer usually will be required to defend the entire lawsuit. This is true even if most of the allegation and causes of action are uncovered. See Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1084 (1993) ("an insurer has a duty to defend the entire third party action if any claim encompassed within it potentially may be covered").

As PHP makes clear, these rules often will require an employment practices liability insurer to defend a lawsuit alleging violations of the Labor Code -- even if the expressly asserted causes of action arguably are excluded. Indeed, broad coverage grants are a hallmark of employment practices liability policies. Although policy terms vary, these policies frequently cover "employment-related misrepresentations," "failure to implement and enforce appropriate corporate policies and procedures," "breach of implied contract," "discrimination," and/or "workplace torts." In many cases, these broad coverage grants may be read to encompass alleged violations of the Labor Code.

For example, employees frequently allege that they were misled by their employer regarding the wages, benefits and breaks to which they were entitled, and they often claim they were misclassified as "exempt" from overtime requirements or received "inaccurate" or "incomplete" itemized wage statements. Allegations of this sort should qualify as an "employment-related misrepresentation" and, consequently, may trigger an employment practices liability insurer's duty to defend. Furthermore, allegations regarding inadequate or inconsistent corporate policies (which are often included in such claims) should also trigger coverage as a "failure to implement and enforce appropriate corporate policies and procedures." And, as the 9th Circuit made clear in PHP, factual allegations regarding potential discrimination and harassment can also trigger coverage under an employment practices liability policy. In short, insureds should not presume that wage and hour claims are not potentially covered just because their insurer asserts that certain causes of action are excluded. This is true even when an exclusion applies to "any Claim based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving" the violation of what are colloquially known as "wage and hour" statutes. Insurers often argue that this language broadly precludes coverage for lawsuits even if the lawsuit includes potentially covered factual allegations. In PHP, the 9th Circuit stated that it "need not and do[es] not address the exclusion in resolving this appeal because it does not bar coverage for the discrimination allegation triggering Greenwich's duty to defend." Stated differently, insurers must defend lawsuits that include potentially covered factual allegations even if an exclusion arguably precludes coverage for some or all of the asserted causes of action.